When version is enabled one can track, store and restore items in a list and files in a library. At a time current document or item can be up to 3 versions i.e. checked-out version, latest minor or draft version, and the latest published or major version.

SharePoint creates a new copy each time the document is uploaded or item is inserted, updated. For example when a list item is created first time, it creates a version 1.0 and when the same item is edited it again, it creates a new version 2.0 and so on which in turn increases database size. Now let's say we are keeping 100 versions of the single item or document, imagine what will be the database size. SharePoint provides version retain policy which limits the version to keep and helps reduce database size.

To enable version for a list or library go to List Settings and Select Versioning Settings.

Note: Custom list does not provide the feature of Minor or draft version. Library supports major and minor versioning.

ListDocument

Here the demo shows versioning with List items. Once the version is enabled on a list, list creates the version 1.0 of the item highlighted below.

Edit the item to create a new version. Here we modified the Status, % completed and Due Date as shown below. Item version 2.0 gets created.

In the below figure item version 1 is showing VersionNo=512

Edit the item and version 3.0 is created. Item version 2 is showing VersionNo=1024